Economists believe taxes can be designed to ensure prices reflect the social costs of activities such as alcohol consumption and smoking. But politicians all too often use the veneer of economic reasoning to justify nannying levies that won’t work or ignore damaging unintended consequences.
An example of this partial thinking arose this week when former chancellor George Osborne declared that the sugary drinks levy he introduced was “more effective than hoped”. His evidence was Office for Budget Responsibility analysis that producers are substituting sweeteners for sugar in their drinks’ recipes more quickly than expected to avoid the tax’s introduction in April. “That means less sugar and better health,” Osborne concluded confidently on Twitter.
Not so fast, George. The tax was designed to reduce obesity, and doing so should be the metric of its success. When he introduced the charge, Osborne believed it would work by encouraging companies to reformulate products to avoid it, increasing prices for remaining sugary drinks to deter consumption, and using the revenue — then expected to be £520m per annum — to fund school sports and other anti-obesity efforts.
That one of these mechanisms has proven stronger than predicted clearly tells us nothing about the overall impact of the policy.
Combined with the company changes to avoid the levy, these revenue shortfalls mean other taxes need to be raised to fund anti-obesity programmes or else they will not happen. Who knows whether the reformulated drinks or fewer funds for other programmes will have a bigger effect?
In fact, there are good reasons to think it unlikely that the tax will do anything meaningful to reduce obesity.
Taxing sugary drinks alone was always too narrow to have any significant impact. Campaigners justified the charge on the basis that the biggest source of sugar in children’s diets is soft drinks. But more of this comes from fruit juice (which is exempted) than sugar-sweetened drinks for small children. For adults, sugary drinks make up less than 2.5pc of our overall calorie consumption — a drop in the dietary ocean.
As the Institute of Economic Affairs’ lifestyle economist Christopher Snowdon never tires of saying, there is no evidence linking sugary drink consumption and overall obesity rates. The latter increased at a time when sugar sweetened drink consumption was falling. There is likewise no cross-country international correlation to suggest a link between the two. And this is not surprising, given there are so many other factors that determine how fat we are.
Even if we accept the role of sugary drinks on obesity, in order for the tax to reduce it, consumption of sugary drinks would have to fall, without people substituting exempted products also bad for their health. Yet evidence from around the world suggests that customers are relatively unresponsive to price increases for popular brands, such as Coca-Cola, and do substitute away to high-calorie alternatives (such as milkshakes) when the price is prohibitive. Again, the impact of the tax on obesity is smaller still.
This makes the business decision to reformulate by UK brands such as Ribena, Irn-Bru and Lucozade all the more interesting. They have wagered their bottom line will be less impacted by consumers potentially disliking their new taste than by having to face the tax itself. Yet if the reactions on Twitter to their new formulations are anything to go by, this is a gamble indeed. It is still perfectly possible they have misjudged their response and will have to readjust their recipes, or else face losing customers to rivals such as Coca-Cola, or other substitutes, who either stick to their guns or are unaffected.
In short then, it is far too early to judge Osborne’s sugar tax a “success”. Reformulation is one mechanism through which the tax could reduce sugar intake, with a marginal impact on obesity. But without considering sales of other products, or the impact of lost revenues on the anti-obesity program funding, we cannot draw any firm conclusions at all.
Sadly, the tendency to declare victory early with sin taxes is common. News that thin plastic bag use fell by between 75 and 90pc at major UK supermarkets following the plastic bag tax introduction is widely heralded as a slam-dunk policy success.
Yet economists never doubted use would fall significantly. The trade-off was always about the overall environmental and economic impact, given that substitute bags tend to be more energy-intensive to produce, likely to have a greater landfill impact and worsen food-associated hygiene. Without long-term data on these issues, and some way of weighing them against each other, it would be premature again to claim success.
Remember that too as calls for single-use plastic taxes amplify. Even the Green Alliance has warned that major action could have unintended consequences, such as increasing global carbon emissions if it causes more agricultural waste, or leading to more deforestation if it encourages paper-based packaging instead.
It’s not surprising that politicians reach for statistics to claim their policies are working, of course. But good economic analysis goes beyond direct effects, considering both the welfare on customers and other consequences in related markets.
Before we rush headlong into more nannying interventions, emboldened by recent forays, we would do well to remember that.Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute